The 8-13 per cent iron-ore price hikes announced by NMDC on Tuesday evening saw its stock rise 3.4 per cent to close at Rs 187.20 the following day. And analysts believe there are more gains in the offing. With iron-ore supply in the country being under pressure on the back of the Karnataka iron-ore mining ban, Goa mining under scanner, lack of environmental clearances for new projects and supplies from Jharkhand and Chhattisgarh remaining affected due to Maoist activities, NMDC is cashing in on the demand. Tuesday’s hike is the second by NMDC. In the June quarter, the company had raised prices by 8-10 per cent.
In fact, analysts say NMDC has changed to a new pricing mechanism, which is based on demand-supply dynamics rather than net export parity. This is positive for the company and will help partially mitigate the effect of the cyclical downturn in the global iron-ore prices, which remain under pressure (spot prices have corrected from the highs of $153 a tonne in April 2012 to $109.35 now). However, thanks to the demand-supply mismatch, the new pricing mechanism is enabling NMDC to hike prices. Giriraj Daga at Nirmal Bang observes that NMDC’s new iron ore pricing mechanism has the potential to re-rate its stock. While Daga has a price target of Rs 215 for NMDC, according to Bloomberg data more than 70 per cent analysts remain positive on the stock with a consensus target price of Rs 204.50.
Even though the volume ramp-up has remained slow, the price hikes are helping NMDC’s revenues and profitability. During the June 2012 quarter, its revenues and earnings before interest, taxes, depreciation and amortisation (Ebitda) each increased by 2.1 per cent year-on-year to Rs 2,840 crore and Rs 2,302 crore despite sales volume falling 1.4 per cent to 6.8 million tonnes (MT), thanks to better realisations.
| STRONG PROFITABILITY | |||
| In Rs crore | Q1' FY13 | FY13E | FY14E |
| Net sales | 2,840 | 11,954 | 12,837 |
| % change y-o-y | 2.1 | 6.2 | 7.4 |
| Ebitda | 2,302 | 9,511 | 10,195 |
| Ebitda (%) | 81.0 | 79.6 | 79.4 |
| Net profit | 1,906 | 7,704 | 8,366 |
| % change y-o-y | 5.8 | 6.0 | 7.0 |
| EPS (Rs) | - | 19.4 | 21.1 |
| PE (x) | - | 9.7 | 8.9 |
| E: Estimates Consolidated financials Source: CapitaLine Plus, Bloomberg | |||
In the long-run, there would be gains on the volume front too. Iron ore sales volumes have remained affected due to breakdown of the eight MT per annum (MTPA) slurry pipeline at its Bailadila mines. However, commissioning of the uniflow railway line system in June is likely to increase evacuation capacity by three MTPA. Further, NMDC is increasing its capacity in Karnataka where iron-ore mining remains banned. The Supreme Court had allowed only NMDC to mine up to one MT per month or 12 MTPA. Though NMDC did not have 12 MTPA capacity in Karnataka, it has been ramping up. Analysts at Barclays feel the ramp-up is not happening at a fast pace as iron ore movement in Karnataka is restricted on account of logistical bottlenecks. Nevertheless, NMDC has ramped up its capacities to about eight MTPA, which will further be ramped up, though gradually, in the current year. Also, NMDC is also on the verge of commencing operations at Bailadila Deposit 11B mine in October 2012, which has a capacity of seven MTPA. Analysts say this will contribute meaningfully in FY14. They estimate sales volumes at 27-29 MT and 32.5 MT for FY13 and FY14, respectively, compared with 27.3 MT in FY12.
Another factor favouring NMDC is the quantum of investments going into pelletisation capacities in India. This will boost demand for iron ore fines, leading to firm realisations for NMDC given that fines constitute about 65 per cent of its product mix.
While looking at the recent correction in international prices, one may expect some adjustment in iron-ore prices during the September 2012 quarter. Nevertheless, higher blended realisations in the first half and strong demand momentum are likely to drive NMDC’s FY13 earning. The key risk, according to Daga, is that NMDC is facing tremendous pressure from the steel industry to lower iron ore prices in the wake of a fall in global prices. He says, “We would closely monitor whether the company budges on the steel industry’s pressure to cut prices.”
